“Too Big To Fail” Report Inconclusive

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On Thursday a U.S. Senate panel finally got a peek at a study that reviewed whether banks considered “too big to fail” can still issue debt at lower interest rates than smaller banks. The verdict was mixed. Although the report confirmed the perception that large U.S. banks have an edge over smaller rivals, the funding advantage seems to have ebbed considerably since the early days of the 2008 recession, when federal government bailouts of big banks prevailed.

Democratic Senator Sherrod Brown

Authored by the Government Accountability Office, the report’s ambiguous findings could provide grist for Congressional leaders on both sides of the TBTF argument. The report doesn’t deny the probability that the government would bail out large banks if warranted, but it also doesn’t conclusively find that big banks have a significant advantage in the financial markets.

In a joint statement commenting on the report, Ohio Senator Sherrod Brown and Louisiana Senator David Vitter, both of whom commissioned the report more than a year ago, said that although the report reveals that the federal backing of big banks has abated, it could still resurface if the economy worsens “or low borrowing costs across the economy begin to rise.”

“Wall Street lobbyists may try to spin that the advantage has lessened,” said the senators, who currently serve on the Senate Banking Committee. “But if the Army Corps of Engineers came out with study that said a levee system works pretty well when it’s sunny — but couldn’t be trusted in a hurricane — we would take that as evidence we need to act.”

To address the issue of too big to fail, both senators, according to a release announcing the report’s findings, have introduced a bill “that would significantly raise capital requirements for large banks.”